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As RRSP season reaches its peak with pitches coming hard and fast about where to put your hard-earned money, it’s worth taking a step back and listening to the insights of a long-time market observer.

His name is John Bogle which won’t mean much to many Canadians, but the 83-year-old founder of Pennsylvania-based Vanguard Group of mutual funds is very much an authority on investing.

The company Bogle founded in 1975 manages more than $2 trillion in assets and was a pioneer of index funds. It now offers a broad array of exchange-traded funds (ETFs), including 11 exchange-traded funds (ETFs) on the Toronto Stock Exchange. Unlike actively managed mutual funds which have highly paid professionals buying and selling shares, index funds and ETFs buy stock indexes. This reduces your fees and adds to your return because they do not need active management.

Fortune
magazine called John Bogle an investment giant of the 20th Century and a few years ago
Time
put him on its list of the world’s 100 most powerful and influential people. While his perspective is American, the trends apply equally to us.

Bogle, in common with others, sees a period of low inflation and low interest rates. He expects the average returns on stocks to be about two percentage points below historic norms, which means we’ll have to work harder to make our savings grow. He sees the flight by investors from managed mutual funds to index funds and ETFs continuing.

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Bogle understands than many small investors feel burned by the risk and volatility of stocks, but feels they have little choice.

“There’s no wealth without risk,” he said in an interview.
“
If you don’t save or invest, you’ll end up with nothing. But do it in the most intelligent way possible. That means low cost, diversification between stocks and bonds and have financial objectives. It’s not easy, because you have to make a whole bunch of assumptions, but make a plan and stick to it.”

Bogle is a big critic of how the investment industry works against small investors and in
The Clash of Cultures
published last fall, he takes aim at the culture of speculation that has replaced long term investing.

The book has a telling statistic that sums up what’s changed. In 1950, individuals owned 92 per cent of U.S. stocks and institutions the rest. Today, pensions, mutual funds and other big players own 70 per cent of the stocks and individuals the rest. With an emphasis on short term performance and an incentive to earn fees and commissions, funds are active traders. Those fees come off the top before you get a penny.

Bogle says the average publicly traded share is turning over at a rate of 250 per cent a year, which means it is being bought and sold two and a half times annually. The buyers and sellers are your funds who get paid on both ends of the transaction.

Here’s what else Bogle had to say:

Q: Why aren’t investors more upset about mutual fund fees?

A: You don’t tend to notice them in the short term, but also many investors came into the market during the 80s and 90s. They had such high returns that fees didn’t seem to matter. Those decades produced returns of 17 per cent a year and even with two per cent fee that’s still 15 per cent.

There’s been an awakening. In the last five years, investors have pulled $400 billion out of actively managed [American] funds and poured $600 billion into index funds. It’s a flight from actively managed funds.

Q: What should we expect as a reasonable rate of return?

A: The returns on bonds will almost certainly be very low in the coming decade. Well below historic norms of five per cent. My guess for (U.S.) common stocks is seven per cent. The long term has been nine per cent, so two points less.

Q: Are you optimistic about stocks?

A: [Yes], but there are [surprises] that make everything we do and think and predict wrong. So don’t be too aggressive. You’re really trying to protect yourself from the fact that your assumptions are wrong.

Q: Where are your investments?

A: All my assets are in Vanguard funds. I’m very conservative. Eighty per cent are in municipal bond funds. In my retirement plan I’m about 55 per cent stocks and 45 per cent bonds And they would all be in index funds.

Q: What’s your favourite investment rule?

A: My favourite is reversion to the mean. [This means that over time all fund managers, no matter how good, will eventually produce an average market return.] Fund managers think they’re smarter than their fellow managers.

If you look back on performance you’ll always find someone who has been good. But it’s like gorillas flipping coins. After 10 years, one out of thousand will flip heads 10 times in a row. And so you say wow, that gorilla is really a lot smarter than the other gorillas. But he isn’t.

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